Free Market Rationale

Neoclassical economists have long argued that the “most effective means of dealing with environmental problems is to subject them to the discipline of the market mechanism.” They argue that environmental degradation has resulted from the failure of the market system to put any value on the environment, even though the environment does serve economic functions and does provide economic and other benefits. Some environmental resources—such as timber, fish and minerals—are bought and sold in the market but their price usually does not reflect the true cost of obtaining them because the damage to the environment has not been included. Other environmental resources such as clean air are not given a price at all and are therefore viewed by economists as free.

For natural resources over which property rights are relatively easy to establish, such as oil, minerals, or timber, prices serve as an early warning signal to companies about scarcity. If the price is rising, that suggests more demand for the resources than can be met by available supply. Companies then have a financial incentive either to find new supplies or to reduce its need by developing alternatives or ferreting out waste. This market process amounts to a sort of ongoing environmental research project seeking an answer to this question: What is the most efficient and least resource-depleting method of producing the goods and services people need?

Some think tank economists also argue that there is little incentive to protect environmental resources that are not privately owned. Their solution is to create property rights over parts of the environment that are currently free. Rights-based economic instruments such as tradeable pollution rights, for example, “create rights to use environmental resources, or to pollute the environment, up to a pre-determined limit” and allow these rights to be traded. Rights-based measures are also a way of providing a pricing mechanism for environmental resources.

Markets can provide any commodity as long as people are willing
to pay the owner more than the opportunity cost of using
the assets for something else, and the consumption of the commodity
can be restricted to those who pay the owner. Wilderness
owners can charge fees to all those who physically cross
the boundary of a wilderness as long as the transaction costs of
monitoring the boundary are not prohibitive.

Both price-based and rights-based measures are market-based measures. In the first case, price-based measures, an economist would say that a price is set and demand determines the quantity of emissions that are released. In the second case, rights-based measures, the quantity of emissions is set and demand determines the price to be paid to discharge them.

Its first pillar comes squarely out of a philosophical tradition that grew from Adam Smith’s notion that individual pursuit of self-interest would, in a regime of competitive markets, maximise the social good. That tradition is so firmly embedded in economics by now that most economists probably do not realize, unless they venture out into the world of noneconomists, that it is a proposition of moral philosophy...